Why Is Big Oil Fighting Dodd-Frank?

In August, the SEC released its final rules on Section 1504 of the Dodd-Frank Act -- more than a year past its deadline. This section, also known as the "Cardin-Lugar" provision, requires gas and mining companies listed on American stock exchanges to disclose how much they pay foreign governments for the right to develop and extract natural resources.

But if companies, including BP (NYS: BP) , Shell (NYS: RDS.A) , ExxonMobil (NYS: XOM) , and Chevron (NYS: CVX) get their way, these regulations will never be enforced. Last week, oil industry lobbying group American Petroleum Institute, or API, which represents these companies, filed a lawsuit to overturn Cardin-Lugar.

One of the major concerns voiced by API was that those bound by Cardin-Lugar would have a competitive disadvantage compared to those that aren't bound by the rules and that refuse to disclose the same information.

Some not bound by transparencyWhile an estimated 90% of major oil companies with international operations will be subject to Cardin-Lugar, several government-owned oil and gas companies are not otherwise bound by the rule, including Gazprom, the China National Petroleum Company, and the National Iranian Oil Company.

Cardin-Lugar opponents worry that this asymmetry could create two competitive disadvantages against those bound by the rules. First, they worry that the disclosures create an informational advantage for foreign-owned companies like those listed above when bidding for contracts. Second, they worry that disclosure requirements will prevent U.S.-listed companies from winning contracts in countries hoping to avoid such disclosures.

Commercially sensitive informationThe final Cardin-Lugar rules require detailed data about how much companies pay on individual projects in licenses, taxes, royalties, and other fees. And according to API, this information is sufficiently detailed and granular to allow competitors with detailed industry knowledge to derive commercially sensitive information about their strategy, explorations, and contract terms.

But is this concern justified? After all, the SEC's final rules don't require companies to disclose how the payments were determined or share other contract details; companies are only required to disclose the payment amounts. Also, no disclosures are required until 60 days after the payments are made.

Oxfam claims it's unclear how this level of information is sufficient to extrapolate detailed, commercially sensitive information about a business' strategy, which also relies on a number of other factors, including pending and expected contracts, contract terms, confidential communications, the company's proprietary technology, oil quality, political risks, etc.

More compelling, Oxfam points out that those opposed to the rules fail to clarify why the information that must be disclosed under the Cardin-Lugar provision counts as "sensitive" and how it could give other companies an upper hand when bidding for contracts.

Bidding advantageThe provision's opponents also claim that laws in Angola, Cameroon, and China prohibit such disclosures. These critics express concern that a competitive disadvantage will arise due to the fact that the final Cardin-Lugar rules require companies to disclose their payments even in cases where such disclosures violate host countries' laws, which may cause government leaders to give preference to companies who don't disclose this information.

Are these concerns justified? Human rights organization EarthRights International argues that the claim that the countries listed above prohibit such disclosures is simply false. They support their claim by providing examples of companies that do disclose payment information in Angola, Cameroon, and China.

The bottom lineWhile companies governed by the Cardin-Lugar provision are likely to face some competitive disadvantages, it's worth repeating that their effects will be mitigated by the fact that most major oil companies with international operations will be subject to these transparency rules.

Also, there are several companies that already adhere to strict transparency rules in all their countries of operation, including Statoil (NYS: STO) , Talisman Energy (NYS: TLM) , and Newmont Mining (NYS: NEM) . In some cases, these companies even report their payments on a project-by-project basis, as required by the Cardin-Lugar provision's final rules.

Finally, several country leaders have expressed a commitment to following the U.S.'s example and implementing similar laws. If this happens, it will put additional pressure on any countries prohibiting transparency in these payments to change their requirements.

Two other key objections to Cardin-Lugar are that compliance will cost too much and that the legislation does little to protect investors, which is the SEC's purpose. Tomorrow I'll discuss those issues in another article here.